Chapter 2: Consumer Theory

Question 1

What are the three restrictions on preferences?

UOL (2016) EC2066 Subject Guide pg 13

Answer 1

1. Non-Satiation (more is better)
2. Completeness
3. Transitivity

UOL (2016) EC2066 Subject Guide pg 13

Question 2

Define Non-Satiation.

Andy Lee (2024) EC2066 Lecture Notes

Answer 2

The consumer is never satiated (satisfied). A bundle with more of either commodity is always preferred to a bundle with less. Thus, more is better.

Andy Lee (2024) EC2066 Lecture Notes

Question 3

Define Completeness.

Andy Lee (2024) EC2066 Lecture Notes

Answer 3

The consumer is able to rank between bundles of goods (i.e. able to determine preference or indifference towards bundles of goods).

Andy Lee (2024) EC2066 Lecture Notes

Question 4

Define Transitivity.

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Answer 4

Transitivity implies that the consumer’s preferences are consistent.

Andy Lee (2024) EC2066 Lecture Notes

Question 5

What is the difference between ordinal utility versus cardinal utility?

UOL (2016) EC2066 Subject Guide pg 13

Answer 5

1. Ordinal utility is the ranking of preferences
2. Cardinal utility is a quantifiable measurement

O.U. is ranking like bronze, silver, gold. C.U. is like “I have 1 apple”

UOL (2016) EC2066 Subject Guide pg 13

Question 6

What is an indifference curve?

UOL (2016) EC2066 Subject Guide pg 13

Perloff, J. M. (2020) Microeconomics: Theory and Applications with Calculus pg 72

Answer 6

An indifference curve is the locus of different bundles of goods that yield the same level of utility.

UOL (2016) EC2066 Subject Guide pg 13

Perloff, J. M. (2020) Microeconomics: Theory and Applications with Calculus pg 72

Question 7

Given the three restrictions on preferences, what are the five implications towards the indifference curves?

UOL (2016) EC2066 Subject Guide pg 14

Answer 7

1. If an indifference curve is further from the origin compared to another indifference curve, any point on the former is preferred to any point on the latter (implied by the assumption that more is better).
2. Indifference curves cannot slope upwards (implied by more is better).
3. Indifference curves cannot be thick (again, implied by more is better).
4. Indifference curves cannot cross (implied by transitivity).
5. Every bundle of goods lies on some indifference curve (follows from completeness).

UOL (2016) EC2066 Subject Guide pg 14

Question 8

Define Marginal Rate of Substitution (MRS).

UOL (2016) EC2066 Subject Guide pg 14, Section 2.3.2

Answer 8

The rate at which a consumer is willing to substitute one good for another along an indifference curve.

The MRS is the absolute value of the slope.

UOL (2016) EC2066 Subject Guide pg 14, Section 2.3.2